by David Chaplin
The Financial Markets Authority (FMA) has contacted local subsidiaries of Australian banks in the wake of the most recent financial advice scandals to hit across the Tasman.
According to Kirsty Campbell, FMA head of supervision, the regulator has been “having conversations” with Australian-owned NZ financial institutions following a string of high-profile investigations into bank financial planning practices in Australia.
Last week the Australian Senate hauled top bank executives from National Australia Bank, Commonwealth Bank of Australia, Macquarie and ANZ before an inquiry into bank financial advice methods. All four banks have previously been the subject of media and regulatory investigations resulting in multi-million compensation packages, bank procedural changes and adviser retrenchments.
Campbell said the FMA has found “no evidence as yet” that NZ bank financial planning arms have operated in a similar way to their Australia parents.
However, in its just-released inaugural survey of Authorised Financial Advisers (AFAs) the FMA did highlight a few areas of concern in New Zealand’s advisory industry.
In particular, the survey says adviser remuneration methods require close scrutiny to manage potential conflicts of interest. According to the survey, AFAs were primarily rewarded by product commission (45 per cent), bonuses based on a mix of measures (40 per cent) and fixed fees/hourly rates (36 per cent).
A fifth of the 1,607 AFAs who answered the payments question also received bonuses “based on volume and set targets”. Meanwhile, 13 per cent of AFAs receive over half of their revenue from a single financial institution.
“There is ongoing debate about methods of remuneration for AFAs in both New Zealand and Australia,” the survey says. “We have previously stated that distribution models such as volume-based incentives, up-front commissions and trail commissions should not encourage conflicts of interest between AFAs and their clients.”
The report flagged the fixed fee statistic for further investigation as the result (36 per cent) “appears too high”. Fixed fee methods are typically held-up as the ideal, conflict-minimisation adviser remuneration approach.
However, Campbell said AFAs may be defining ‘fixed fee’ in a number of ways.
“This definition requires clarification in subsequent years, as it may be have been interpreted differently by different AFAs,” the survey says.
The FMA report also found while about 70 per cent of AFAs give advice on KiwiSaver, about half (of the 1,044 who answered that question) consider only a single provider. Less than 5 per cent of AFAs advise on five or more of the approximately 30 KiwiSaver providers.
The study also highlighted the possible misclassification of retail clients as wholesale investors, potential insurance product churn in small number of AFAs and some advisers with large clientbases (over 500) for further research.
Campbell said the survey had already resulted in a number of enquiries into AFA business practices, including among the 2 per cent of advisers who reported high volumes of insurance sales.
She said the survey was primarily designed to provide an up-to-date picture of the AFA advisory industry that will serve as a benchmark for future studies, which will be produced annually.
“We will be going back to the market with the insights the survey has provided,” Campbell said. “We will be interested in seeing their conclusions.”
About 1,900 AFAs were registered at the survey date in June 2014, however, about 60 advisers have since left the industry. The survey did not capture the 20,000 or so financial advisers who do not have to register “individually as they are linked to a Qualifying Financial Entity (generally large organisations such as banks, fund managers and brokers”.
A further 6,000 Registered Financial Advisers (RFAs), who deal in ‘simple’ financial products, principally insurance, also escaped survey duties.
– David Chaplin is publisher of Investment News NZ